15 October 2010

RACE TO THE BOTTOM

The federal reserve apparently believes there is not enough inflation and they would like to get it above 2% to 3% or 4%. This would be done by printing money and buying government bonds. The administration’s economists want a weaker dollar to encourage exports. Of course other countries feel the same way andwant their currencies to depreciate for the same reason, and all want the Chinese yuan to rise, presumably to slow down their export machine. But it is the height of irresponsibility for the country with the world’s reserve currency to manipulate its currency rather providing a predictable and stable store of value. Furthermore all this does is make all of us poorer. It is obvious that if you have something of value, if it is worth less it is in fact worth less. That means the dollars you have buy less.

We are seeing commodity prices escalating upward as a result, for everything from the corn and soybeans that are vital to the food chain, to oil, to gold. This means higher gas prices, as well as higher food prices. That certainly looks like inflation that people can ill afford. Seared in my memory is the misery of the Carter years with double-digit inflation worthy of a banana republic, with instability and sky high interest rates. That won’t exactly prop up the housing market. Runaway inflation is inevitable down the road unless we stop printing money, slash government spending and begin reducing debt instead of increasing it. To get economic growth to resume we need to assure a stable business climate, reduce regulations and red tape, and cut taxes to encourage new investment, which is the only way to create jobs. What we have now is a climate of uncertainty to the point where, incredibly, we don’t know what our taxes are going to be next year due to an irresponsible congress that has failed to pass any legislation.

It is ridiculous to blame the Chinese for this, when it is all of our own doing. Consider our deal with China. They sell us really cheap stuff, which goes into the hands of people who could otherwise not afford it. What do they get from us? A lot of paper debt that is worth less each day. If Chinese goods cost more the people most hurt are those with the least amount of resources. Much of these goods are the products of American companies. For example, Apple designs everything here but builds it in China. Trade is a net plus for this country in terms of job creation, and clearly in terms of prices. We have a trade deficit because Americans save too little and spend too much. But rather than encouraging savings the government is penalizing the thrifty with miserably low returns on savings accounts due to the easy money policy.

We need a strong and stable dollar to assure that we remain the world’s foremost economic power. Instead of racing for the bottom we should be reaching for the top. None of these inflationary policies and wasteful government spending are going to create jobs. The only way that that will happen is with a positive business environment and taxation that encourages, rather than discourages investment. Unless current policies are changed we will continue to be victims of a no-growth environment.